Jumat, Januari 01, 2010


The Palm Jumeirah, a man-made island in Dubai built by Nakheel, a subsidiary of Dubai World.
As you surely heard over the weekend, Dubai World -- the emirate's state-owned investment company -- has asked its creditors for a six-month delay on its interest payments. The announcement sparked panic in global markets: Dubai's stock exchange dropped 7.3 percent yesterday; Egypt's, 8 percent; Abu Dhabi's, more than 8 percent. U.S. and U.K. markets plummeted on Friday as well.
We haven't jumped on this story because, frankly, neither Evan nor myself are experts on Gulf economies or high finance. (We're trying to avoid the kind of shallow insta-analysis that leads bloggers to post a single graph and draw conclusions about a very complex story.)
But after reading about the story all weekend, and talking with a few sources this morning, here's my omnibus take on the latest developments. (If you've been following the story closely, I probably won't say anything you don't already know.)

How much does Dubai World owe?

The emirate of Dubai owes about $80 billion, and most of that debt is owned by Dubai World. The most commonly-cited figure for the company's debt is $59 billion. But that statistic includes all of the company's liabilities, and so it isn't really a meaningful metric for discussing last week's default. That was one reason for today's angry outburst from Sheikh Mohammed bin Rashid al-Maktoum, the ruler of Dubai, who said reporters (and investors) "do not understand anything" about the emirate's finances.
The National describes that $59 billion claim as misleading, and says the company's actual debts are $23.8 billion. Dubai World itself owes $5 billion; the other $18.8 billion is divided amongst subsidiary companies.
In a statement today, Dubai World stressed that some of its subsidiaries are unaffected by the default.
The proposed restructuring process will only relate to Dubai World and certain of its subsidiaries including; Nakheel World and Limitless World. The process will not include Infinity World Holding, Istithmar World and Ports & Free Zone World (which includes DP World, Economic Zones World, P&O Ferries and Jebel Ali Free Zone), all of which are on a stable financial footing.
In other words: The total amount of debt involved in the default is far less than that $59 billion figure.

The question of sovereignty

Whatever Dubai World actually owes, investors have been waiting to see whether the Dubai government will stand behind the company's debts. As Felix Salmon noted last week, investors have long expected governments to backstop their state-owned companies. That implicit guarantee discourages investors from doing their due diligence, which, in turn, encourages state-owned companies to take unwise risks. It's a nasty incentive structure.
Abdulrahman al-Saleh, Dubai's finance minister, shattered that notion yesterday when he announced that Dubai will not guarantee the company's debts.
"Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the government, which is not correct," Mr Saleh said.
This decision is popular with many economists, who view Dubai World's default as a large-scale version of the commercial real estate busts that have happened around the world since the financial crash.
It also raises the question of whether Abu Dhabi, Dubai's flush neighbor, will bail out the cash-strapped emirate. If the Dubai government isn't willing to stand behind Dubai World, it's unclear why Abu Dhabi -- which has lent money to Dubai in the past -- would make a similar guarantee. Reports from this weekend, before al-Saleh's announcement, said Abu Dhabi was already wary of helping Dubai.

Other warning signs?

We'll end on a forward-looking note. It's true that Dubai World's default doesn't present a major systemic risk to the world financial system. It will probably hurt a few big banks -- HSBC, in particular, which has an estimated $17 billion in exposure to Dubai World -- already reeling from the financial crisis. But it won't have catastrophic implications.
It could be important, though, as Paul Krugman noted last week, as a portent of sovereign defaults to come -- particularly in the over-leveraged Gulf states. Abu Dhabi will probably be okay; the UAE's capital has built up hundreds of billions of dollars of reserves in sovereign wealth funds, and it produces more than 2 million barrels of oil per day.
Other Gulf states are more worrisome, particularly Qatar, which has invested billions on natural gas infrastructure in recent years. LNG prices are at unexpectedly low levels, and they're not expected to recover in 2010. That could make it difficult for Qatar -- which recently completed a $7 billion bond issue -- to recoup its infrastructure expenses.

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